Be Careful When Buying Fertilizers Because Not All Are Created Equal

For more than a year, investors of the biggest fertilizer stocks including PotashCorp. (NYSE: POT) and Agrium (NYSE: AGU) have hoped the market their companies operate in would reverse course. In that time, potash prices got hammered due to the breakup of one of the world's biggest global fertilizer partnerships. Not surprisingly, this crushed their margins, and profits as a result.

Both Potash and Agrium performed poorly last year, and their earnings declined significantly. This was no surprise, as most people knew their fundamentals would worsen as the potash market crumbled. However, neither company has good things to say about the current year either, meaning investors may have to exercise even greater patience to wait for the turnaround to materialize. In the meantime, investors may want to consider nitrogen player CF Industries (NYSE: CF) , which is navigating the environment relatively smoothly.

Patience is a virtueThe potash industry was shocked last year when Russia's Uralkali disrupted one of the world's largest potash partnerships by ending its joint venture. It was universally understood that the companies engaged in fertilizer production and marketing would suffer, and suffer they did. PotashCorp.'s profits fell by 14% last year, which management attributed specifically to falling potash prices.

Ditto for Agrium. Its profits from continuing operations collapsed by more than two-thirds in the fourth quarter. For all of 2013, earnings per share dropped 24% versus the prior year.

Both PotashCorp. and Agrium are desperately trying to gain some momentum this year. One positive catalyst occurred a few months ago, when China's state-owned company Sinochem agreed to buy potash from Canpotex, which is a joint venture owned by PotashCorp, Agrium, as well as industry peer Mosaic. The agreement calls for Canpotex to provide either 1 million tons of potash or a full one-third of China's potash imports next year, whichever is greater.

However, the benefits from this announcement, or any meaningful recovery in potash prices, is yet to be seen. To be sure, Agrium sees some signs of phosphate market stabilization this year, thanks to China coming back into the market and strong demand in North and South America. Because of these factors, management notes phosphate prices have increased significantly since November 2013.

Despite this, negative influences persist in the forms of unplanned shut-downs, and increased global phosphate production costs. Overall, the fertilizer companies themselves don't exactly maintain spectacular outlooks for what the future holds. For example, PotashCorp. doesn't believe its own business will recover at all in 2014. Management expects earnings per share to fall another 21% in the current year.

An industry outperformer to considerWhile Potash Corp. and Agrium grapple with stagnating fertilizer prices,CF Industries continues to shine. That's because it operates heavily in nitrogen fertilizer, which represents a different product focus than its two industry competitors. That's shielded it from the carnage sweeping through the potash and phosphate markets. This allowed CF Industries to post results last year that, while certainly far from spectacular, weren't as bad as the broader industry experienced. Net sales and earnings per share each fell by 10% and 13%, respectively.

Importantly, CF Industries also holds a more optimistic outlook than other fertilizer producers. CF Industries management sees urea prices recovering in 2014, which is critical to nitrogen fertilizer. As urea prices fell last year, Eastern European manufacturers shut down and gas curtailments in Libya and Egypt severely tightened the market. Going forward, CF Industries sees these restrictions easing and management hopes 2014 will see a return to more normal business conditions.

The bottom line for Foolish investors is that while the fertilizer market continues to look unstable, nitrogen is showing signs of strength. Relatively speaking, CF Industries held up pretty well last year, and it's due to its unique product focus. CF Industries began switching focus toward nitrogen almost a decade ago, a decision that is looking wiser by the day. While Potash Corp. and Agrium suffer, CF Industries is looking forward to a brighter future ahead.

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